Teflon stocks glide higher

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Markets again lacked a unifying theme on Wednesday, as world stocks hit record highs, Wall Street ended mixed and Treasury yields tumbled, all against a backdrop of soft U.S. economic data and a lack of clarity on global trade talks.

In my column today I look at how, despite justifiable fears of tariff-fueled price rises later this year and beyond, the global forces of disinflation are stronger right now than the forces of inflation. More on that below, but first, a roundup of the main market moves.

I'd love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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Financial market moves can usually be traced to, or at least reasonably explained by, a narrative or new development that changes investors' view of the value of the asset in question. But some days, they are difficult to rationalize. 

Wednesday was one of those days, at least in equities. Wall Street rose for a third session, the Nasdaq climbed back into the green for the year, and global stocks rose to their highest level on record. 

Yet the newsflow was hardly bullish, although the nonpartisan U.S. Congressional Budget Office did lower its estimate of how much President Donald Trump's tax-cut and spending bill will add to the national debt by $1.4 trillion. 

On the trade front, the Trump administration doubled steel and aluminum tariffs, and it became clear that trade talks with Europe and China are proving difficult. The deadline for countries to show their "best offers" to avoid other punitive import levies taking effect next month passed on Wednesday too.

China's decision in April to suspend exports of a wide range of rare earths continues to wreak havoc across crucial supply chains around the world, especially in the auto industry. Some European auto parts plants have suspended production.

On the economic data front, the U.S. 'stagflation' alarm bells could not have rung louder on Wednesday. 

Figures showed U.S. private sector employment growth in May was the slowest in more than two years, perhaps an ominous signal for Friday's non-farm payroll report. Meanwhile, the services sector contracted in May for the first time in nearly a year and input prices paid by businesses leaped to their highest in two and a half years.

If gold prices took their cue from the 'flation' side of those numbers, the bond market took its cue from the 'stag' side of the equation. Treasuries prices rallied strongly, and the 10-year yield posted its biggest fall since mid-April. 

President Donald Trump used the weak economic data to take to social media and repeat his call on Fed Chair Jerome 'Too Late' Powell to lower interest rates, complaining that 'Europe' has already cut rates nine times. 

If he's referring to the European Central Bank, that's not quite accurate. The ECB has cut rates seven times since June last year, but is widely expected to make that eight on Thursday. 

The Bank of Canada took a leaf out of the Fed's book on Wednesday, deciding against cutting interest rates and choosing to wait and see what the effects of U.S. trade policy are. It said another rate cut might be needed, however, if the economy slows sufficiently.  

Aside from the ECB, the biggest market-moving event on Thursday could be China's 'unofficial' services sector PMI report for May. Signs of renewed weakness might be the cue for a 'risk off' tone to world markets on Thursday, although the evidence of Wednesday shows that's no guarantee. 

Investors, consumers and policymakers may justifiably fear the specter of tariff-fueled inflation later this year and beyond, but it's powerful global disinflationary forces that are weighing most heavily right now.

The OECD said on Tuesday it expects collective annual headline inflation in G20 economies to moderate to 3.6% this year from 6.2% last year, cooling further in 2026 to 3.2%. 

But the United States is an "important exception," the OECD argues, and it sees inflation there rising to just under 4% later this year and remaining above target in 2026.

While annual PCE consumer inflation in the U.S. cooled to 2.1% in April, the slowest rate in four years and virtually at the Fed's 2% target, consumer inflation expectations are the loftiest in decades. The Fed has paused its easing cycle as a result, and U.S. bond yields are higher than most of their G10 peers.

Economists at Goldman Sachs share the OECD's view that U.S. inflation will pick up to near 4% this year, with tariffs accounting for around half of that. Many others also agree that the U.S. appears to be the exception, not the rule.    

The world's next two largest economies, China and the euro zone, find themselves trying to stave off disinflation. Deepening trade and financial ties between the two may only intensify these forces, keeping a lid on price increases.

Annual inflation in the euro zone cooled to 1.9% in May, below the European Central Bank's 2% target, essentially setting the seal on another quarter-point rate cut later this week. More easing appears to be in the cards.

As economists at Nomura point out, inflation swaps are priced for inflation undershooting the ECB's target for at least the next two years. This, combined with weakening growth due to U.S. tariffs and disinflationary pressure from China, could force the ECB to cut rates another 50 basis points to 1.5% by September.

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